the risk management blog

Why Fraud Prevention Really Matters

byMark Lowers | July 01, 2014

Despite the wealth of well-publicized information about the high prevalence of organizational fraud and the high costs of fraud, it is always surprising to learn that so many companies operate without systematic fraud prevention programs, or fail to review their programs on a regular basis.

In fact, there are very important reasons fraud prevention is worth the effort. Here are some of them:

Fraud can cause catastrophic losses.

Losses from fraud that are so great they threaten your business’s existence are relatively rare, but they do happen. In the networked digital world especially, near catastrophic failures can happen overnight, as Target learned. The consequences of large failures can impose financial, reputational, loyalty, and other brand-related costs that will persist for a very long time. The cost of a fraud prevention program is tiny compared to a major failure.

Cost management matters in a hyper-competitive world.

We see businesses competing fiercely on price in markets where the Internet provides access to commerce with a simple mouse click. Under these tight margin business conditions, managing the costs of fraud can make the difference between profit and loss. The organizations that reduce the risk of fraud gain an important competitive advantage over those that don’t.

Fraud is common!

Research by the Association of Certified Fraud Examiners (ACFE) found that the “typical organization loses 5% of revenues each year to fraud” with a median loss of $145,000 per case. Frauds are usually not discovered immediately (the ACFE found the median discovery time was 18 months from the beginning of the fraud), so the more a fraud prevention program can improve your chances of discovering the crime, the smaller your losses will be.

Your company’s vulnerability to fraud is a “known unknown”.

Unless you have designed and implemented a fraud prevention program using best practices, you simply do not know where the vulnerabilities in your organization are. However, just because you don’t know about them does not mean they don’t exist. The process of developing a fraud prevention program is beneficial both because it will help prevent future frauds, and also because it is a process of discovery.  Are there any frauds occurring in your organization today?

Fraud prevention increases confidence in your organization.

Your investors, partners, and auditors will all have more confidence in your ability to control your fate if you have a strong fraud prevention program. You probably think a lot about the risks other organizations pose to you; the flip side is that they also think of you as a risk. Your demonstrated efforts to reduce the risks of fraud, both internally and externally, make you a better investment, business partner, insurance risk, and supplier.

Enterprise risk management is a complex process that pays for itself through cost reduction, brand and reputation enhancement, and bottom line success. Controlling fraud risks should be an important part of it.